An Overview to understand Monetarism.
                     AN OVERVIEW TO UNDERSTAND MONETARISM
WHAT IS MONETARISM?
 Monetarism is a macroeconomic theory stating 
that governments can foster economic stability 
by targeting the growth rate of the money 
supply.
Source: www.investopedia.com
BACKGROUND ON MONETARISM
 Monetarists believe monetary policy is more 
effective than fiscal policy (government 
spending and tax policy). 
 Stimulus spending adds to the money supply, 
but it creates a deficit adding to a country's 
sovereign debt. That could increase interest 
rates.
Source: www. thebalance.com
BACKGROUND ON MONETARISM CONT.
 Monetarists say that central banks are more 
powerful than the government because they 
control the money supply.
 They also tend to watch real interest rates 
rather than nominal rates. 
Source: www. thebalance.com
MONEY SUPPLY
 Money supply has become a less useful 
measure of liquidity than in the past.
 However, the money supply does not measure 
other assets, such as stocks, commodities and 
home equity. People are more likely to save 
money by investing in the stock market 
because they receive a better return. 
Source: www. thebalance.com
HOW IT WORKS?
 When the money supply expands, it lowers 
interest rates. This is due to banks having more 
to lend, so they are willing to charge lower 
rates. 
 That means consumers borrow more to buy 
items like houses, automobiles, and furniture.
Source: www. thebalance.com
HOW IT WORKS CONT.
 Decreasing the money supply raises interest 
rates, making loans more expensive this slows 
economic growth.
 This is a targeted rate the Fed sets for banks to 
charge each other for overnight loans, and it 
impacts all other interest rates.
Source: www. thebalance.com
MILTON FRIEDMAN IS THE FATHER OF MONETARISM
 Milton Friedman popularized the theory of 
monetarism in his 1967 address to the 
American Economic Association. 
 He said that the antidote to inflation was higher 
interest rates, which in turn reduces the money 
supply.
Source: www. thebalance.com
GOLDILOCKS ECONOMY
 The belief is that if the Fed were to properly 
manage the money supply and inflation, it 
would theoretically create a Goldilocks 
economy, where low unemployment and an 
acceptable level of inflation are prevalent.
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EXAMPLE OF MONETARISM
 Federal Reserve Chair Paul Volcker used the 
concept of monetarism to end stagflation. 
 By raising the federal funds rate to 20% in 
1980, the money supply was reduced 
drastically, consumers stopped purchasing as 
much, and businesses stopped raising prices.
 That ended the out-of-control inflation, but it 
helped create the 1980-82 recession. 
Source: www. thebalance.com
THE FAILURE OF MONETARISM
 the connection link between money supply and 
price levels seems to have been overestimated, 
as was proved in the failure of monetary 
economics in the last 1970s and early 1980s. 
 Also known as the Federal Reserve’s Monetarist 
Experiment, the monetary tightening was not 
able to curb short-term inflation during this 
period.
Source: www. thebalance.com